BIS says forex markets under threat from EMU

The Bank for International Settlements warned yesterday that the start of the European single currency could trim the size of the foreign exchange market by as much as 10 per cent, writes Diane Coyle. But experts in London, by far the biggest currency trading centre and the most vulnerable to a shrinking European market, said much of the adjustment to the euro had already taken place.

In its annual report, the BIS said its latest survey of currency trading around the globe, in April 1995, suggested 10 per cent of the foreign exchange market could disappear. With London accounting for far more trading between EU currencies than either New York or Tokyo, banks in the City would suffer most from any further loss of business arising from monetary union.

The BIS added that this prospective decline would coincide with a squeeze on dealing margins due to the recent rapid growth of electronic broking. Spot foreign exchange trading via either Reuters or its competitor Electronic Broking Service has grown rapidly, with turnover on EBS climbing from an average of $20bn (pounds 12bn) daily at the start of 1996 to about $80bn daily now.

However, foreign exchange specialists in London played down the BIS report, saying much of the EMU-related reduction in turnover had already happened.

Peter Von Maydell at UBS said: "For all practical purposes EMU started a couple of years ago." He said exchange rate volatility, and therefore currency trading, between the likely EMU members was at its lowest for decades.

Michael Burke at Citibank agreed. "There has been a significant slowdown in the growth of total turnover since the 1995 survey, and the whole of the intra-European bloc has stopped growing," he said.

The BIS surveys of global foreign exchange turnover, which had reached a daily average of $1.2 trillion in April 1995, showed growth of 45 per cent between 1992 and 1995, and 39 per cent during the previous three years.

Its report yesterday suggested that new business in the foreign exchange markets would come from trading "exotic" currencies. It said the volume of trade in the Indonesian rupiah against the dollar and yen had already reached the volume of Italian lira for German mark trades in 1995.

While the market participants agreed, they said this type of business was starting from a very small base. "These trades are only just starting to appear on the radar screen," Mr Von Maydell said.